Background Note
17.An interest in possession is an interest in which a beneficiary has the right to any income arising on the property in a trust. Changes made to the trust rules in 2006 mean that most interest in possessions are now included in the relevant property regime. Broadly, IHT charges arise on relevant property:
at 20 per cent on assets put into trust which exceed the IHT nil-rate band (with a further charge of up to 20 per cent if the person dies within seven years of making the transfer);
at 6 per cent every ten years on the value of the trust assets over the nil-rate band (the “periodic charge”); and
an “exit charge” when funds are taken out of trust between ten-year anniversaries at a rate based on the time since the last “periodic charge”.
18.HM Revenue & Customs (HMRC) became aware of arrangements that sought to avoid any IHT charges on assets that are put into a trust. The arrangement was designed to allow individuals who would normally be chargeable to IHT on transfers in to trust to purchase an interest in a trust that had not been subject to UK IHT charges when property had originally been transferred in to it.
19.The section provides that where an interest has been purchased at full value then that interest will be treated as part of a person’s estate. Where a person puts funds in to a trust in the normal course of events the normal IHT charges will apply, and the changes in new section 5(1B) will not apply. If a person purchases an interest in a trust other than at arms length then section 10 of IHTA will not apply and there will be a transfer of value in the normal way.
20.Where new section 5(1B) applies to treat the interest as part of a person’s estate the property in the trust will still be part of the relevant property regime.
21.Some interests in possession are already treated as part of a person’s estate – for example, a disabled person’s interest. This section does not affect any such interests.
